Assets in Actively Managed ETFs Exceed $1 Trillion Globally, According to Reuters

Active ETFs Reach $1 Trillion Milestone Amid Regulatory Changes and Innovation

By Suzanne McGee

According to data from ETFGI, assets in actively managed exchange-traded funds (ETFs) worldwide reached a record $1 trillion at the end of August. This growth has been driven by more accommodating regulations and a surge in product innovation.

Active ETFs aim to outperform their benchmark indexes, including popular ones such as the S&P 500 and the Russell 1000 Growth Index. The first active ETF was launched by Bear Stearns in 2008.

Although active ETFs represent just 7% of the total global ETF market, they have accounted for 30% of all inflows into these funds over the past few years, as noted by Matthew Bartolini, head of SPDR Americas Research.

A significant factor in this growth has been the "ETF rule" established in 2019, which simplified the approval process for active ETFs from the U.S. Securities and Exchange Commission. Since then, the assets in the active ETF category have grown approximately tenfold.

The growth trend has continued into this year, with active ETF assets rising by 42% as of August 31.

The relaxed regulations have not only facilitated growth but also spurred innovation, encouraging fund issuers to create unique products to attract investors. Active ETFs vary widely, from basic options like the Large Cap Value ETF to niche products such as the Vice ETF, which invests in companies involved in the alcohol, tobacco, and cannabis sectors.

These regulatory changes have allowed ETF issuers to introduce more innovative strategies, according to Bartolini.

Active ETFs can exhibit significant volatility, as seen with the Ark Innovation ETF, which surged by 152% in 2020 but then fell by 23% the following year. So far in 2024, it has declined by 9.74%, contrasting with a 20% increase in the S&P 500. Some active ETFs also involve higher risk, such as those leveraging the performance of specific stocks.

However, not all active ETF issuers are experiencing success. A report from Morningstar earlier this year revealed that the ten largest issuers control 75% of active ETF assets, while the bottom half of active equity ETFs hold only 3% of the sector’s assets.

Jack Shannon, a manager research analyst at Morningstar, remarked that ETFs that simply replicate traditional stock-picking strategies have struggled to draw in assets.

Tim Huver, senior vice president of ETF Servicing at Brown Brothers Harriman, indicated that active ETFs may necessitate more rigorous research from investors. Nonetheless, he believes the sector is at a pivotal moment.

A recent survey conducted by Brown Brothers revealed that over 90% of ETF investors plan to increase their allocations to active ETFs. Huver expressed optimism about the future, suggesting that the second trillion in assets may accumulate much more quickly than the first.